Closing the Gap Between Practice and Research in Industrial Engineering by Elisabeth Viles Marta Ormazábal & Alvaro Lleó

Author:Elisabeth Viles, Marta Ormazábal & Alvaro Lleó
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

4 Discussion

The analysis and discussion is one of the most important aspects of an instructional case. In this case, all the questions used to support the case are important but especially the final questions which request analysis and discussion after the computation of the TCO. For example, in Question 10, participants are asked to comment the fundamental principle of TCO that states that “the cheapest supplier may not be the one with the lowest purchase cost.” In fact, in the cases presented (which represent the most common situations in the company that provided the basis for the design of this case) the lowest TCO coincides with the lower purchase cost. Then, we can question the interest of TCO which is a detailed approach and a very demanding process in terms of cost calculation if this lead to the same results that would be easily obtained only by comparing the price of the parts.

Indeed, the TCO is not only important to select the supplier that represents the lowest cost to the company. TCO is also important to know more and understand the costs associated with suppliers in order to give to the buyer a better bargaining position and support a more effective managing of supplier’s related costs. In fact, as it can be seen also from Question 12, despite that purchasing cost represents a significant portion of the total computed cost, the calculation of TCO is important to show the real dimension of the cost of buying from a particular supplier. In the cases that have been studied, the TCO (total cost) is between 1.5 and more than 3 times the purchase cost. Therefore, other costs beyond the purchase cost are (very) important and must be managed properly.

In Case 2, three national suppliers are compared with an Asian supplier. The supplier with lower TCO is simultaneously the one with the lower price per unity. However, it is clear that the global cost goes far beyond the acquisition price. Indeed, the total costs of providing this part is equivalent to a value between 2 and 3 times the acquisition costs. The cost of the part is the most significant cost item but in all the cases, such costs are less than 50% of total cost. With an accurate perspective of the TCO, the company can track and find more cost-reduction opportunities. Table 1 shows these cases.Table 1TCO versus acquisition costs

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